Friday, November 08, 2013

All financial schemes for retirement are misdirections of the real challenge, which is creating enough real-world surplus to support 75 million retirees.I received a number of interesting comments on my recent series on the insolvency of the Social Security Ponzi Scheme:The Generational Injustice of Social (in)Security (November 6, 2013)The Problem with Pay-As-You-Go Social Programs: They're Ponzi Schemes (November 5, 2013)There are two questions here:1. How can we sustainably pay for 75 million beneficiaries in 2020?2. Are there sufficient resources, labor and capital to support 75 million beneficiaries in the manner that they were promised?The first question presumes there are limits on the creation of 'free money," and the second presumes there are limits on the surplus generated by the economy that can be devoted to supporting retirees.As a quick primer on Social Security: the program, paid by payroll taxes on earned income, has two funds: one for worker/retirees and survivors of workers, and another for disabled workers and their dependents.As of 2011 ( Annual Report of the Trustees of the Social Security Trust Funds), there were 38 million retirees, 6 million survivors and 11 million disabled and their dependents drawing benefits from the program. The latest numbers from the Social Security Administration (SSA) show 57 million beneficiaries as of 2012.Since there will be 53 million people 65 and older in 2020, and the number of survivors and disabled are rising as fast or faster than the number of retirees, we can project the program will have around 75 million beneficiaries in 2020, seven short years away.(Given that the number of people choosing to retire early at 62 rather than wait for full benefits at 66 is exceeding SSA projections, this estimate is probably conservative.)Reader D.L.J. proposed a solution that many believe would be sustainable: dispense with payroll taxes, illusory trust funds and borrowed money entirely, and just print the money and transfer it directly to retirees:

Now set aside your traditional view of 'how the system now works'.What if each of the 50,000,000 retirees received a monthly check for $2500 for $30,000 per year. It doesn't come from a trust fund and it doesn't come from a working member of the workforce; it comes directly from the US Treasury. There are no bonds issued to raise the money, no interest to pay and no maturity schedule--just money credited to the accounts of the seniors.

Now, what if at the same time, there is no payroll tax to fund the, well, trust fund.

The 50,000,000 retirees would/could spend their $30,000 each into the economy to support the production of goods and services of 50,000,000 active workers providing an average contribution to income of $30,000 each. Of course the workers would actively purchase goods and services from one another as well.

Over the years, I have received many similiar proposals from readers, the key component being the issuance of cash by the U.S. Treasury rather than the Treasury borrowing money on the bond market via selling Treasury bonds.The conventional economic concern with issuing freshly printed "free money" in this way is that this expansion of the money supply would soon trigger inflation that robs every holder of the currency. Expanding the money supply debases the existing stock of currency.Since such a proposal has never been tried to my knowledge, we don't have any direct experiential data on the unintended consequences of direct distribution of newly created cash on a large scale. I suppose if an equivalent sum of money were destroyed or removed from the money supply, inflation could be controlled, but destruction of such a large sum of money elsewhere would have negative consequences for those whose capital was destroyed.Perhaps there is some dynamic here I am missing, but to the best of my knowledge history suggests that inflating the money supply is only sustainable if the production of goods and services rises in analogous fashion. If the surplus generated by the economy remains flat, inflating the money supply leads to a depreciation of the currency being printed, i.e. inflation or theft by other means.I conclude that this idea, however appealing, boils down to a "free lunch." In my view, a nation can only spend what it generates in surplus from labor and the productive investment of capital. Priting money is a short-term shortcut that raises the apparent surplus being generated but does not expand the actual surplus.What if the surplus being generated simply isn't large enough to support 75 million beneficiaries in the manner that they were promised? Correspondent Philip C. explains that the money for retirement is the least of our concerns: it's the actual stuff needed for living/consuming that may be insufficient:

You point out correctly that there is no trust fund for Social Security payments. However it is easy to show that even if there were, the system could still not function. The reason is quite simple: the goods and services that retirees require (food, energy, medical, consumable goods, recreational, entertainment, etc.) in practical terms cannot be stored and therefore must be provided by the current working population.

Even if retirees had their Social Security pensions it wouldn’t do them any good because the stuff they needed would be scarce and the good old law of supply and demand would price them out of the market. What young people would tolerate working in such an environment with such an onerous load?

It seems to me that the root of the looming disaster is not so much the Ponzi aspect, despicable as it is, but the unrealistic expectation that people can actually retire at age 65 (or whatever age) and continue to consume resources and the productive output of an ever decreasing working population. Trust fund or no trust fund, the working population will be burdened by retirees; an important question is how long will they put up with it?

The social disruption will be of major proportions. Retirement ages will have to rise (they are already programmed to rise here in Australia in a couple of years) and expectations will have to be rationalised or there will be enormous stresses in our societies.

This seems to get at the heart of the matter. Money is after all a claim on real-world resources, goods and services. Printing or borrowing money into existence does not create more resources, goods or services to exchange for the money.In this sense, all financial schemes for retirement are misdirections of the real challenge, which is creating enough real-world surplus to support 75 million retirees (not to mention the other 75 million people drawing government benefits). Census: 49% of Americans Get Gov’t Benefits; 82M in Households on Medicaid.Printing or borrowing money are both attempts to get a free lunch; alas, there is no free lunch. We can only spend what we extract or generate in surplus, i.e. what's left after subtracting the costs of production, labor and capital.

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

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